'Tepid' recovery needs help, CLU expert says

Despite predictions of a shrinking state economy, weak real estate and lagging job growth, the state and national forecast presented at California Lutheran University on Wednesday was seen as “hopeful.”

“This is the most optimistic forecast we’ve had out for at least a year,” said Bill Watkins, executive director of the Center for Economic Research and Forecasting. The event was the center’s first public presentation of the national and state forecast since being formed at CLU in June.

Watkins said there still is a lot of uncertainty.

The state’s economy will continue to shrink in diminishing degrees in each of the first three quarters of 2010 — finally starting to grow in the fourth quarter.

The report found:

* Retail sales will take until the fourth quarter to turn positive.

* California won’t gain jobs until the second half of 2011.

* Residential and commercial real estate will remain weak next year.

The forecast for California has improved a little since the center issued its forecast in September because of a better U.S. outlook; improved Federal Reserve policy that implies interest rates will remain low; rising productivity that indicates employers are asking more of employees as activity increases — usually a step before new hiring; and the need for businesses to replace aging capital, Watkins wrote in the forecast report.

“The recovery is likely to be one of the most tepid in post-World War II history,” he added.

The Fed kept interest rates low Wednesday, opting to keep the bank lending rate at zero to 0.25 percent. The decision was made because consumer spending remains sluggish, the job market is weak and credit is tight, even though the economy is growing and layoffs are easing.

Watkins cautioned that there can’t be a vigorous recovery until the banks are fixed. He suggests that the government needs to step in, take them over, clean them up and resell them — something that has met a lot of political resistance.

“Unless we do that, we’re just going to muddle along,” he said.

California’s recovery should be weaker than the U.S. because of its budget problems and other issues. Watkins said the state runs a risk of default, which could lead to another financial crisis if banks don’t honor state-issued vouchers.

The state’s Treasurer’s Office responded later in the day with an adamant assertion that the state was at no risk of defaulting on its bond payments, something that has never happened.

Tom Dresslar, spokesman for state Treasurer Bill Lockyer, issued a statement calling Watkins’ assessment “nothing more than irresponsible fear-mongering with no basis in reality, only roots in ignorance.”

The state’s Department of Finance followed with a statement of its own later in the day outlining three “fail-safe mechanisms” to ensure the state makes debt service payments on schedule.

Director Mike Genest called it “inaccurate and irresponsible” for the forecast’s authors to suggest the state is on the verge of default when the state has multiple times more cash than it needs to make its debt service payments.

Watkins responded by saying it would be irresponsible not to consider what would happen if vouchers weren’t accepted or if the state had trouble rolling over a bond.

Saying the state has never faced a problem before doesn’t mean it never will, he said.

Discussion of possible default was just one part of the center’s study of the state’s current condition. In the forecast report, Watkins provides a general outline of what has gone wrong in the state.

The state has been losing jobs at a faster pace than the rest of the nation, and more people have been moving out of the state than moving in during 10 of the past 15 years, he noted.

The education system is threatened by budget cuts, affordable housing runs into numerous roadblocks and the state’s infrastructure is in decline. Watkins also warns that a difficult and expensive business climate does not lead to growth and opportunity.

To move ahead, Watkins proposes several steps.

He advises against regulations to reduce carbon emissions in the state, which have hurt California’s competitiveness in attracting businesses compared with other states.

He calls for a commitment to improve K-12 education in the state and rebuilding the higher education system to meet future demands.

Building new infrastructure and encouraging immigration also are needed to boost the economy for the long term, he said. Watkins mentioned how students on visas have to leave the country as soon as they finish their educations.

“That is stupid,” he stated in the report.

Watkins said the state and nation could benefit from encouraging the talented risk-takers who tend to immigrate.

“These people, they bring vigor to the economy.”

While some other forecasts are more optimistic about the coming year, Watkins argues that the pickup in the third quarter of this year was tied to a lot of temporary efforts that won’t be sustained, such as Cash for Clunkers, and that this recession cannot be compared with typical recessions because the financial panic has caused a longer, deeper recession.

About 120 people attended the presentation at CLU in Thousand Oaks.

Edward Moses, CEO of the Housing Authority of the city of San Buenaventura, said he finds the forecasts to be more realistic and practical.

Moses said there was a silver lining to some of the negative data, such as lower land prices, which makes it easier to acquire property for affordable housing.

Ed Summers, chairman of the Economic Development Collaborative of Ventura County, said he appreciated the insight on creating and retaining jobs — and some of the positive news in the presentation.

“Bill tends to be realistic, so when he says something positive, you like to hear it,” Summers said.